6 steps to financial freedom
Freedom sounds sweet. While we have achieved
political freedom way back in 1947, many still struggle with financial freedom.
Everyone wants to be financially free and it is not something that is exclusive
for just a few people. Having said that, financial freedom is not a child’s
play. It is a series of steps.
So, here are some of the steps that you need to
take towards financial freedom:
Set your goal: Having
a goal gives a sense of direction and purpose. You will also be able to track
your progress. In this aspect, it is essential to understand what financial
freedom means to you. Many associate financial freedom with early retirement.
Here are some of the other instances of how financial freedom may look like:
- Freedom to choose a career without worrying
about money
- Freedom to go on frequent vacations without
straining your budget
- Freedom to take care of the needs and wants of
other people the way you want
- Freedom to retire early
Have an emergency corpus: The
second step in this journey is having an emergency fund. It is a crucial step,
as it will help you to tide over emergencies. No one can predict crises and
hence, it is always better to be prepared. Emergencies can include job loss,
car repairs, house repairs etc. Without an emergency corpus, you may have to
dip into your savings, which may adversely delay your goals. Or worse, take a
loan.
Hence, one needs to have an emergency corpus with 3
to 6 months of expenses. The best way to park in an emergency corpus is in a
liquid fund. It is crucial to keep in a different account, out of your sight so
that you are not tempted to use it.
Budget
Having a budget is a crucial part. And this is one
step that requires trial and error. A simple yet effective thumb rule is the
50-30-20 rule. According to this thumb rule, you may allocate 50% of your
income towards needs, 30% for wants and save the rest 20%. You can also tweak
it according to your convenience. However, it is better to have a higher
allocation of investment and savings in the budget.
Secondly, you can also identify your monthly
expenses based on the past six months. Later divide your expenses into
essential, non-essentials and junk. Use this list to prioritise and cut
whatever possible. You can also use budget apps to track your expenses. Also,
invite every family member to share their concerns regarding the budget.
Pay yourself first
If you read financial blogs and books, you must
have come across the concept of paying yourself first. Even before we receive
our salary, many of us start planning ways to spend it. If you want to be free,
you should consider paying yourself first. By this, we mean that you should
earmark a certain amount of money for investing. You can also automate your
investments. Set up a systematic investment plan (SIP), and you can see your
money grow over time.
Another way to pay yourself is by investing in
yourself through reading books, going to workshops etc. This will help you to
increase your earning potential and to build a second source of income.
Say bye to debt
While people like to segregate debt into good or
bad, there is nothing good about debt. There are harmful debt and less harmful
debt. Having debt is one of the most significant impediments in financial
independence. If you have many loans, look at reducing loans that don’t carry
tax benefits. Otherwise, look at repaying the debt with the smallest principal.
Once you can repay the smallest loan, you will be more charged up to clear your
other debts.
Get a financial advisor
Last but not at least, having a financial advisor
can immensely help you in this journey of financial independence. Everything
you need to know about finance is available online. But, can you be sure that
you will remain disciplined even when the market tumbles or when you are
tempted to buy an expensive car to show off to your neighbour instead focussing
on early retirement? Let’s face it that controlling our emotions are a lot
harder. And that is why you need a financial advisor.
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